WASHINGTON (AFP) - With little doubt about the Federal Reserve's plans for a quarter-point rate hike, financial markets were focusing on another question: When will the Fed stop?
Based on signals from central bank officials, economists say the Federal Open Market Committee, which meets Tuesday, is almost certain to make its third rate hike since June 30, boosting the federal funds rate to 1.75 percent.
"It's been a pretty well-telegraphed policy over the past few months," said Tim McGee, chief economist at US Trust Corp.
But observers say Fed chairman Alan Greenspan and his colleagues, who have pledged a "measured" effort to bring up interest rates from their lowest levels in decades, must think hard before taking base rates up much higher.
David Rosenberg, chief North American economist at Merrill Lynch, said the Fed is moving to lift base rates up to two percent as part of a "normalization" of rates, but that the economy is still too fragile for a series of steep increases.
"Our two percent peak forecast for Fed funds has taken a lot of folks by surprise, but ... does anyone really believe that a 300-400 basis-point Fed tightening cycle wouldn't generate a recession?"
Greenspan has argued that the economy is gaining traction after a "soft patch," but some argue that the recovery is still fragile and could be choked off by a number of factors, including higher rates.
Observers say the Fed does not want to spook the market by deviating from its steady rate hikes or by altering the wording of its message, which might be seen as suggesting the recovery is faltering.
"The Fed has made clear that the tightening is not over," said Lehman Brothers economist Ethan Harris.
"In an election period, they do not want to call attention to themselves by surprising the markets (with either language or rate changes) at the meeting. Thus, we expect a 25 basis-point hike with one minor change in the text, acknowledging that 'recent inflation data have been more contained.'"
The debate is open among economists about whether the Fed will pause at one or both of its next two meetings, November 10 and December 14.
"There is increasing speculation that if the economic data doesn't show some more strength, they might stop raising rates. Some people think they may stop at this (September) one," McGee said.
"There are periods they may pause and there will be periods they accelerate the process, but I think broadly speaking we should expect to see rate hikes throughout all of '05 into '06," said Mark Zandi, chief economist at Economy.com.
"December is now the most likely date for a pause," said Avery Shenfeld, an economist for CIBC World Markets.
Economists differ on whether this pause will last based on their views on the economy.
Those who think the economy will struggle believe the pause could last, while those who think the economy is on firm footing expect rate hikes to quickly resume in February.
This split is reflected in the market, with the futures market showing a 50-50 split over the odds of a rate hike in February.
Shenfeld, for one, said the pause could last several quarters because it will be clear by December that growth will be disappointing.
"I expect to see the fourth quarter softer again. Once we're through these clear-out sales of cars and other items, we'll return to a slower pace for consumer spending," he said.
But Zandi said that it would take a serious slowdown to keep the Fed from tightening.
"The hurdle for them not to continue on this measured path is quite high," Zandi said.